Questions and Answers of Essentials Accounting

Simply put, Sarbanes-Oxley addresses the following:• Establishment of a Public Company Accounting Oversight Board (PCAOB) under the SEC to oversee public accounting firms and issue accounting
If Accounts Receivable had increased during the period, the adjustment of net income would be the opposite; that is, an increase in a noncash current asset leads to an adjustment that [adds to /
Because the increase in Cash was [more than / less than] the amount of Revenues, we must [add to / subtract from] net income the amount that Cash was greater than Revenues. As shown above, this was$
This example shows that if the ending balance in Accounts Receivable was less than its beginning balance, the increase in Cash would be [more than / less than / the same as] the amount of
The Accounts Receivable balance would have been [$12,000 larger than / $12,000 smaller than / the same as] the balance when cash receipts equaled sales revenues. Revenues in 2012 would still have
Whistle blowers are those who have publicly exposed undesirable or unlawful behavior by companies. This term comes from the notion that blowing a whistle calls attention to something. SOX also
The above accounts show that in this situation, the ending balance of Cash would have been [$12,000 larger than / $12,000 smaller than /the same as] the Cash balance when cash receipts equaled sales
This is the case with all working capital accounts. If the beginning balance is the same as the ending balance, an adjustment from the accrual basis to the cash basis [is / is not] necessary when
In Chico Company, all sales were credit sales. If sales in 2012 were$400,000, Revenues would be $ ,000, and Accounts Receivable would increase by $ ,000 when these sales were made.
SOX has also made it a crime to destroy or conceal documents that might be used in official proceedings. Presumably company officials will now be discouraged from such behavior. Because such
If all revenues in 2012 were from cash sales, cash inflows [would /would not] be the same amount as revenues; that is, if sales revenues were $400,000, cash inflows would be $ ,000. However, in most
Cash, accounts receivable, inventory, and similar items that will be converted into cash in the near future are c assets.Accounts payable, wages payable, and similar obligations that are due in the
Thus, depreciation [is / is not] a source of cash. (This is a common misconception because of the role it plays on the statement of cash flows to adjust net income to a cash basis.)
In summary, SOX has provided the oversight and structure to encourage annual reports that are [easier to read / more comprehensive and detailed]. In so doing the new law requires the behavior and
To repeat, the cash for fixed assets was paid out when the fixed assets were purchased (or when borrowings made in connection with such a purchase were paid back). Cash [is / is not] affected by the
If Depreciation expense was $4,000 higher than the amount reported in Exhibit 10, Net Income would be $4,000 [higher than /lower than / the same as] the amount reported. The $4,000 increase in
Suppose that Chico Company had decided to recognize Depreciation expense of $10,000, rather than $6,000, in 2012 but made no other changes in the accounts. The cash flow from operating activities
Although depreciation expense is subtracted from revenue in arriving at net income, it is not a cash outflow . Net income is $6,000 less than it would have been with no depreciation expense.
According to its income statement, Chico Company had a Depreciation expense of $ ,000 in 2012. Depreciation recognizes a portion of the cost of fixed assets. The cash outflow for the assets on hand
According to its balance sheet (Exhibit 10), Chico Company owned PPE, most of which it had acquired [prior to / in] the year 2012 at a cost of $ ,000. The cash outflow for these assets occurred[prior
Net income is the difference between r ____ es and e ____ es. “Cash flow from operating activities” is the difference between operating cash inflows and operating cash outflows. To find the
Therefore, since the statement of cash flows must total the change in for an accounting period, it must total to the difference in the Cash account from one (which financial statement?) to the next.
In preparing the statement of cash flows, we are interested in changes in the balance sheet accounts from one accounting period to another. The purpose of the statement of cash flows is to provide
The indirect method uses balance sheet account changes to determine whether such changes had a positive or negative impact on c ___ f ___ . Since the balance sheet must always stay in balance, it is
There are two acceptable methods of preparing the statement of cash flows. One is to summarize the inflows and outflows to the Cash account directly ; it is therefore called the d ____ method.Most
For example, assume that an entity sold goods for $1,600 on May 1, and the customer paid $1,600 for these goods on June 1. Its cash inflow on May 1 would be [$0 / $1,600], and its revenue in May
Both the income statement and the statement of cash flows report flows during the period. The difference is that the income statement reports flows on the accrual basis; that is, inflows are measured
In this part, we describe the third required statement. It reports the flow of cash during the accounting period, and it is therefore called the statement of c __ f __ s .
A company must prepare three financial statements. We described two of them in earlier parts. The [balance sheet / income statement] reports the financial status of the company as of the end of each
The mat ____ concept states that the expenses of a period are costs associated with the revenues or activities of the period.
Realization concept: Revenues are recognized when goods or services are .
Materiality concept : Disregard matters.Disclose matters.
Conservatism concept: Revenues are recognized when they are reasonably c _____ . Expenses are recognized when they are reasonably p ______ .
Asset-measurement concept: Accounting focuses on the f __ v ___ of monetary assets; nonmonetary assets are reported at an amount based on c __ .
The accounting concept that assumes that an entity will continue to operate indefinitely and that it is not about to be sold is the g ___ -c _____ concept .
Entity concept: Accounts are kept for an as distinguished from the p _____ associated with that entity.
Money-measurement concept: Accounting reports only facts that can be expressed in .
Dual-aspect concept: ____________________ = _____________________ + _________________ .
In an analysis of a business’s performance, percentages of certain income statement items are usually calculated. The base, or denominator(i.e., 100%), is sales revenue . One percentage is the
Remember that dividends are [an expense / a distribution of earnings to owners]. Dividends are not [an expense / a distribution of earnings to owners].
As a result, the total Retained Earnings on December 31, 2012, was $ .
Retained Earnings decreased by $4,390,000, representing a distribution to the shareholders in the form of .
During 2012, profitable operations resulted in Net Income of$ , which increased Retained Earnings by this amount.(Net income is the bottom line on the income statement.)
Exhibit 8 shows a financial report package consisting of an income statement and two balance sheets. Exhibit 8 shows that Retained Earnings on December 31, 2011, was $
Thus, a useful accounting “report package” consists of a(n)at the beginning of the accounting period, a(n) for the period, and a(n)at the end of the period.
A(n) (what accounting report?)reports certain changes in retained earnings that have taken place between two (what accounting reports?).
An income statement is a summary of R E that have been generated during a fiscal year.
Because income is always supposed to be the difference between sales revenue and expenses, a term such as “sales income” [is / is not] a misleading term. However, it is sometimes used.A PACKAGE
Revenues are defined as [increases / decreases] in the R E item on the balance sheet. Expenses are [increases / decreases] in that item. Net income is the difference between and .
To arrive at net income, dividends [are / are not] subtracted from revenues. Dividends [are / are not] an expense. Dividends are a distribution of earnings to shareholders.
The final item (the bottom line) on an income statement is called(or Net Loss , if expenses were larger than revenues).
The next item on Exhibit 8, for, is shown separately because it is an especially important expense. These taxes relate to the income tax payable on the current period’s income, not the income tax
In accordance with the m ______ concept, these expenses include costs related to the c _____ period and costs that do not benefit f ____ periods (i.e., losses).
Exhibit 8 shows that are subtracted from Gross margin, giving the item before.
The difference between sales and cost of sales is called in Exhibit 8. Write an equation, using the terms cost of sales , sales revenue , and gross margin .5 2
The item on the second line is labeled of. It reports the cost of the goods or services whose revenue is reported on the first line. This is an example of the concept.
There is no standard format for an income statement. The lower portion of Exhibit 8 shows one common format. The first item on this income statement is , which is the amount of products (i.e., goods
The amount added to Retained Earnings as a result of profitable operations during a period is the income of the period. An I ____ statement explains how this income was earned.
The equity section of a balance sheet shows the two sources of equity capital: (1) the capital supplied by equity investors (i.e., proprietors, partners, shareholders), which is called Paid-in C
The matching concept says that general costs of operations during any period are expenses of that period. Thus the $4,000 general costs of operations in June are expenses in (what month?).
In accordance with the realization concept, the $30,000 down payment received on House B in June [was / was not] revenue in June. It will be revenue in (what month?). Because Homes, Inc., has an
The matching concept requires that the costs associated with the revenues of a period be recognized as expenses of that period.Therefore, the two commissions associated with House A, totaling$ ,
Now consider the costs that are associated with the total revenue from the sale of House A, $180,000, in June. One of these costs was the cost of House A, which was $ .
Delivery of the deed to a house is delivery of the ownership of the house. Exhibit 7 states that for House A this happened in(what month?); therefore, revenue from the sale of House A is recognized
The balance sheet at the beginning of a period reports assets obtained as a result of e _________ s made in earlier periods. Part of these asset amounts will expire and therefore will be e _____ s of
The cash payments associated with any of these expenses may have been made in a prior period or in the current period, or they may be made in a future period, when the [assets / liabilities] are paid.
Third, there are losses that are recognized in the current period.These may recognize a reasonably possible decrease in a(n) [asset /liability] because of fire, theft, or other reasons. Or, they may
Second, there are costs that are associated with activities of the period . The expenditures for these costs were made either in the current period or in an earlier period. If made in an earlier
Three types of costs are expenses of the current period. First, there are the costs of the goods and services that are delivered in the current revenues period and whose r ______ are recognized in
A loss is recorded as an expense if it is reasonably possible that the loss occurred, even though it is not certain. Thus, if a customer sues Hall Company in 2011, and if it seems reasonably possible
Thus, although an asset does not provide benefits during a period, it is an expense of that period if its cost has expired for any reason. Such expenses are called losses . A loss is recorded as an
Assets provide benefits to future periods. Suppose Bailey Company owned an uninsured machine that was destroyed by fire in 2011. The machine[will / will not] benefit future periods. The asset amount
Of course, many items of expense are paid for in cash during the accounting period. Salaries of $100,000 earned in 2011 and paid in cash in 2011 are recorded in the following entry.Dr. . . . . . . .
Prepaid Expenses are turned into expenses by a debit to the [asset /expense] account and a credit to the [asset / expense] account. Accrued Liabilities are discharged by a debit to [Cash / Accrued
Earlier we saw that if rent is paid prior to the period in which the expense was incurred, the amount is first debited to Prepaid Rent, which is a(n) [asset / liability] account. As the previous
In January 2012, Murray Company paid $8,000 to its landlord for the December 2011 rent. The journal entry in January is:Dr. . . . . . . . . .Cr. . . . . . . . . . . . . . . . . . . . . . . . . .
Murray Company will pay its December rent of $8,000 in January.In December 2011, it records the Rent Expense of December and the related liability, Accrued Rent, by the following journal entry:Dr. .
OPEB are accounted for in the same way as pensions; that is, the expense is incurred [in the years in which the employee earns the right to them / when the benefits are paid]. The liability is
Many companies agree to pay for health care or other benefits to retired employees. These fringe benefits are called Other Post-Employment Benefits , abbreviated to the initials ___ .
Dylan King retired on December 31, 2011. She will be paid a pension of $10,000 in 2012. The journal entry for the 2012 payment is:Dr. . . . . . . . . . . . . . . . . . 10,000 Cr. Cash . . . . . . . .
Dylan King earned a pension benefit of $2,000 in 2011. She had earned similar benefits in earlier years. The journal entry for this transaction is:Dr. Pension Expense . . . . . . . . . . . . . . . .
Many companies agree to pay employees a pension when they retire.Employees earn the right to their pension benefits when they work.Therefore, if an employee earns a $2,000 pension benefit in 2011
In January 2012, Stockman Company employees were paid the$10,000 owed them for work done in 2011. This payment decreases the liability Accrued Salaries. The journal entry for this transaction is:Dr.
In the last week of 2011, Stockman Company had a salary expense of $10,000, which was not paid to its employees. Write the journal entry for this transaction.Dr. . . . . . . . . ____ Cr. . . . ____
Liabilities for expenses incurred but not yet paid for are called accrued liabilities . Account titles may describe the nature of the liability, in this case A _____ Salaries.
Employees of Stockman Company earned $10,000 in the last week of 2011, for which they were paid in 2012. The $10,000 was [an expense /an expenditure / both an expense and an expenditure] in 2011.On
Amounts earned by the employees of Stockman Company for services performed in 2011 are e _____ s of 2011. If Stockman paid its employees one week after the week they worked, the amounts earned in the
The expired cost for buildings and equipment is called depreciation expense . If Hall Company bought a machine for $6,000 and expected it to provide service for five years, the amount of expired cost
Also, as with insurance and rent, the amount of building and equipment cost that is reported as an expense in each period is the amount of [expired / unexpired] cost in that period.
Buildings and equipment also benefit future periods. They are assets like Prepaid Insurance and Prepaid Rent, except that they usually have a longer life and therefore benefit [more / fewer] future
Similarly, if Cameron Company made an advance payment of$3,000 to its landlord on January 31 for two months’ rent, its asset account P _____ Rent would have a balance of $ on January 31, a balance
Hall Company purchased a two-year insurance policy on December 31, 2011, for $4,000.During 2013, Hall Company received the remaining $2,000 of insurance protection. Make the journal entry for
Hall Company purchased a two-year insurance policy on December 31, 2011, for $4,000.During 2012, Hall Company used up half of this insurance protection, thereby incurring $2,000 of insurance expense.
Hall Company purchased a two-year insurance policy on December 31, 2011, for $4,000.The effect of this expenditure is a decrease in Cash and an increase in the asset Prepaid Insurance. Record the
The general name for intangible assets that will become expenses in a future period is prepaid expenses . The asset account may identify the particular type of prepaid expense. Thus, the name of the
A tangible asset has physical substance; an intangible asset does not have physical substance. Buildings, equipment, and inventories of goods are [tangible / intangible] assets. The protection
If expenditures were made in an earlier period, the unexpired costs are a ___ s until the period in which the expense is recognized.We shall consider several examples. The first is an intangible
When products are delivered, their costs are matched with revenues in the period in which the sale takes place. These costs become expenses of that period. This is one application of the m ______
Hall Company purchased an automobile for $15,000 in March and sold it for $18,000 in May.In May, Hall Company recognizes $18,000 of from the sale of this automobile. It must m ___ the $15,000 of cost
To illustrate, consider an automobile that Hall Company, an automobile dealer, purchased for $15,000 in March and sold (i.e., delivered)for $18,000 in May. At the end of April, the automobile was in

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